Stephen Hester, the chief executive of Royal Bank of Scotland, promised there would be 'no disruption' for customers as plans to sell 316 branches to Santander collapsed in a disastrous development for the bank.

Mr Hester said: 'I can assure all affected customers that there will be no disruption to the service they receive. It is business as usual in all of these branches, and customers don't need to take any action.'

The planned sale has been in the pipeline for more than two years and has been subject to long delays.

Collapsed: The Santander transaction was a key plank of Hester's recovery plan

A
disposal of the branches is a requirement of the
European Commission as one of the conditions for the bank receiving a
£45billion bailout from the Government.

But the Spanish bank said the sale, originally scheduled to be completed in 2011 but extended to the end of 2012, would 'not be achieved' in this time.

Santander UK chief executive Ana Botin said: 'Our guiding principle throughout this transaction has been a seamless journey for customers - which requires the business to be delivered to Santander UK by RBS in a steady state.

'We have concluded that given delays it is not possible to complete this within a reasonable timeframe.'

RBS must offload the branches by the end of 2012, but Hester may now struggle to find alternative purchasers in the
current climate.

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'It is of course disappointing that
Santander decided to pull out of this transaction, especially for the
customers and staff involved,' said Hester. 'However, RBS's strong progress in our
restructuring plans means we can continue to provide a stable home for
this business and its customers pending a further resolution.

'While this is a profitable part of
our business that we would rather not part with, RBS has worked hard to
ensure it is substantially separate from our UK branch network and
corporate business and largely ready to be taken on by a new owner.

'Much of the heavy lifting associated
with a transfer has already been completed, including separating data
for 1.8million customers and putting in place a stand-alone management
team.

The embattled bank supremo recently
told an investor conference that RBS is ‘well on the way to being a good
bank’. He claimed it is set to exit the Government’s asset protection
scheme that insures its billions of pounds of tainted loans.

The Santander transaction was a key plank of his recovery plan.
At the time it was announced in the summer of 2010, Hester said it was ‘an important milestone in our restructuring work’.

The sell-off was initially thought likely to raise £1.65billion for RBS.
The deal would have involved around 1.8million customers having their accounts moved to Santander.

It emerged last night that Santander, whose UK operation is entirely
ring-fenced from its Madrid-based parent, pulled the plug. This is the
second disappointment in a week for Hester as the bank sold off the
first tranche of shares in the float of insurer Direct Line, raising
£800million.

City analysts questioned whether the stock market listing raised a good
price for taxpayers, who still hold an 82 per cent stake in the bank.
The float valued the whole of Direct Line at just £2.6billion, around
half the amount Hester initially had in his sights.

Hester, who has received no bonus for
two years, has already been hit by the computer meltdown at NatWest
that affected millions of customer accounts earlier this year.
He is braced for a large fine over its involvement in the Libor
rate-fixing scandal, following the £290million penalty meted on rival
Barclays.

The bank made a £1.5billion loss in
the first half of this year and set aside £310million to cover its
computer meltdown, interest rate swaps and PPI loan insurance
mis-selling.

It has also admitted it is facing another large penalty from the US
authorities for violating trade sanctions with Iran and other rogue
regimes.

The deal with Santander was
previously expected to have been done by the end of last year but has
dragged on. One major stumbling block is that the two banks’ computer
systems do not mesh together.

There are also suggestions that the branches in question are no longer
performing well enough to meet Santander’s performance targets, which
may have led it to seek a lower price.